Inflation is the reality of life. Inflation occurs when the supply of money is high in the economy compared to the prevailing production level, so there is high demand, and people are ready to pay incrementally more money for purchasing various commodities. Thus, it gradually depletes the value of money.
When building your retirement corpus, you need to estimate the corpus required to get the desired lifestyle based on the current level of expenses and apply the expected inflation rate to it. But what if your expected rate of inflation goes wrong? Any deviation in the expected inflation rate can significantly impact your retirement corpus requirement. Similarly, let’s know about some more aspects of inflation that can make you worry when building your retirement corpus.
It Reduces The Value Of Money
Inflation eats into the value of money. It means whatever a specific amount of money can buy today will buy less tomorrow. That explains why people expect salary increments every year. Government employees expect dearness allowance to revise from time to time, and children expect more pocket money. Inflation increases the prices of goods and services; hence, you need more money to buy the same set of goods and services in the future. Let’s understand this with an example.
If the inflation rate is 5 per cent, your corpus has to grow by 5 per cent to maintain the same purchasing power. This also means that if your wealth doesn’t increase in any year, it goes down in the real term. Suppose you need Rs 5 crore after 20 years when you retire; the value of Rs 5 crore 20 years down the line will be about Rs 1.25 crore in today’s term (assuming 7 per cent inflation).
In Some Services And Products, Inflation Is Much Higher
While we see inflation numbers, known as consumer price index or CPI, usually quoted around 4% to 6% or sometimes even more, this does not give the true picture of inflation. It is based on a basket of limited goods. In many cases, the inflation rate is much higher than the quoted numbers. Think of children’s education, healthcare expenses, the price of houses, and many other items where inflation is often much higher. The inflation is almost always close to two digits for these services barring a few slowdown years. So, if you are planning a retirement corpus, you must consider the money requirement for certain goods to be much higher than what’s required in the present day.
Invest To Beat Inflation
It is extremely important to invest continuously to grow your wealth at a greater rate than the rate of inflation in the long term. Fixed deposits and debt funds may cover inflation, but as stated, there are many services and goods where the inflation is much higher than the CPI, so they may not be sufficient. You have to beat inflation by a good margin to have enough corpus after retirement and create adequate wealth.
Investing in equity funds through SIP (systemic investment plan) mode can be a great start. Equity funds provide high returns, but they also pose an increased risk. However, in the long run, the risk balances out. As you get closer to retirement, you can switch your allocation to low-risk investment avenues like debt funds and FDs.
Beware Of Tax Outgo
The more you earn, the more taxes you have to pay. So, despite earning more, you may fall short of your desired retirement corpus. Thus, you need an efficient tax plan to beat inflation and utilize the increase in your income to build a bigger corpus for your retirement.
It is always advisable to consult a registered investment advisor to plan your retirement corpus and beat inflation with a substantial margin in the long term.
The author is an Independent Financial Journalist